Taxes on RE sale gains 50+ years homeowner

[mistymoney]

I have an elderly relative who is at the end of life stage. She is in assisted living and has several 'fatal' diagnoses, but despite that, she just keeps trucking!

She is about to run out of money and must sell the family home she and her husband purchased in the 70s to pay for her ongoing care. Homes on her block are generally well fixed up and retail for 7-900k. Her home has had very little updates and is on 'deferred maintenance' for the past decade or so.

There is an offer that I think was accepted for about 500k over the purchase price. Her husband passed away about 10 years ago, maybe more. As a couple, they had not filed a tax return for a few decades, living very modestly on 2 social securities and a pension. The money she has been using for the assisted living is mainly from her husband's life insurance when he passed away. Current income is one ss check and the pension, likely not more than about 30k.

I found this on the google.

"Capital gains tax rates for 2024
Home sale profits above the $250,000 or $500,000 thresholds incur capital gains taxes of 0%, 15% or 20%, depending on your income. Capital gains taxes on a home sale are more common in high-cost areas"

would she get the 0% treatment due to low income?

[secondcor521]

First, you figure out the basis.  Generally speaking, the house basis would get stepped up to the value of the house as of the husband's date of death.  Whether this is a full step up in basis or only half depends on whether their state of residence is a community property state or not.

Then you can take the sales price minus the basis to figure the capital gain.  Since she's single and her husband died more than 2 years ago, she would generally only be eligible to exclude $250K of gain.

Anything not excluded would be a long term capital gain.

If the gain is over that $250K exclusion amount, there are additional knobs to turn.  Certain selling expenses, most notably realtor fees but there are others, can be subtracted from the gain as well.  Home improvements made after the husband's death would also be subtractable.  See IRS Pub 523 for details.

In most cases, even if she can exclude the entire gain, she would need to report the sale on her tax return on Form 8949 and Schedule D.  Any taxable gain is taxed just as if she had sold a stock or mutual fund at a gain - it stacks on top of her ordinary income and is taxed at capital gains rates and brackets.  You can plug in her income and gain here to see how it works:  https://engaging-data.com/tax-brackets  It won't be quite right, because she's probably over 65 so her standard deduction will be a bit bigger, but it'll give you the gist of it.

[morethanconquerors]

@secondcor521 's answer is correct assuming she inherited the house from her husband. If the house was titled in both of their names when he passed, she would only receive stepped up basis on his half of the house. If the house was titled in her name only, she would need to use the purchase price.

Depending on the answer to the above, you could be looking at up to $250k of capital gain (assuming $500k over purchase price, first $250k excluded), which would put her in the 15% cap gain tax category.

[secondcor521]

@secondcor521 's answer is correct assuming she inherited the house from her husband. If the house was titled in both of their names when he passed, she would only receive stepped up basis on his half of the house. If the house was titled in her name only, she would need to use the purchase price.

Depending on the answer to the above, you could be looking at up to $250k of capital gain (assuming $500k over purchase price, first $250k excluded), which would put her in the 15% cap gain tax category.

Emphasis added.  The bolded statement is not true in the several community property states, where the property would get a full step up in basis.

I do agree with the general idea that how the asset was owned can impact the capital gains situation.  I did simplify and assume that the house was jointly owned given the language of the OP's post, which is why I included the phrase "Generally speaking" in my original reply.

[morethanconquerors]

@secondcor521 's answer is correct assuming she inherited the house from her husband. If the house was titled in both of their names when he passed, she would only receive stepped up basis on his half of the house. If the house was titled in her name only, she would need to use the purchase price.

Depending on the answer to the above, you could be looking at up to $250k of capital gain (assuming $500k over purchase price, first $250k excluded), which would put her in the 15% cap gain tax category.

Emphasis added.  The bolded statement is not true in the several community property states, where the property would get a full step up in basis.

I do agree with the general idea that how the asset was owned can impact the capital gains situation.  I did simplify and assume that the house was jointly owned given the language of the OP's post, which is why I included the phrase "Generally speaking" in my original reply.

Good point, I do not do tax in any community property state, so that did not come to mind. I just wanted to reply to make sure OP takes it into consideration since it can change the answer pretty drastically.

[SeattleCPA]

I bet she owes zero capital gains tax.

Surely they have some improvements over the decades which reduces the $500K gain.

I bet the selling costs could be a a few thousand dollars. May a few tens of thousands. That further reduces the gain.

$500K of appreciation over fifty years? I would be surprised if most of that didn't occur before husband died. So some large chunk of the appreciation is sheltered by Section 1014 step-up. Maybe 40% if not a community property state and maybe 80% if a community property state?

She gets to exclude $250K due to Section 121.

She may have large medical deductions if she's in a nursing home that could shelter income.

Finally, she'll have a big chunk of 0% capital gains at least at a federal level.

[mistymoney]

First, you figure out the basis.  Generally speaking, the house basis would get stepped up to the value of the house as of the husband's date of death.  Whether this is a full step up in basis or only half depends on whether their state of residence is a community property state or not.

did not know about the step up! thanks!!

[mistymoney]

@secondcor521 's answer is correct assuming she inherited the house from her husband. If the house was titled in both of their names when he passed, she would only receive stepped up basis on his half of the house. If the house was titled in her name only, she would need to use the purchase price.

Depending on the answer to the above, you could be looking at up to $250k of capital gain (assuming $500k over purchase price, first $250k excluded), which would put her in the 15% cap gain tax category.

Yes, was titled in both names. I think the step up at husband's death will take care of any worries I had that a large chunk would go to taxes. Will definitely advise a professional file this for her (another relative is handling the sales and details)

[secondcor521]

@secondcor521 's answer is correct assuming she inherited the house from her husband. If the house was titled in both of their names when he passed, she would only receive stepped up basis on his half of the house. If the house was titled in her name only, she would need to use the purchase price.

Depending on the answer to the above, you could be looking at up to $250k of capital gain (assuming $500k over purchase price, first $250k excluded), which would put her in the 15% cap gain tax category.

Yes, was titled in both names. I think the step up at husband's death will take care of any worries I had that a large chunk would go to taxes. Will definitely advise a professional file this for her (another relative is handling the sales and details)

AARP Foundation Tax Aide should be able to handle this situation.  They will prepare and e-file federal and state income taxes for free.  No need to be a member of AARP.

To help the tax preparer, it would be good for the relative handling the sale to provide a copy of the 1099-S and an itemized closing statement like the HUD-1 to the tax preparer.  As mentioned earlier, various closing costs can also be used to reduce the gain, and those generally are listed on the HUD-1 or similar.